SUERF Policy Note - R(ising) star?*

This increase in real rates has reignited the debate among academics and policymakers about the level of the natural rate of interest, or r*, the real short-term interest rate that would prevail if the economy was operating at its potential and inflation was at target. [...] The fall and rise in real interest rates In the decades following the inflation spikes of the 1970s and early 1980s, we have observed a gradual and persistent decline in real short- and long-term risk-free interest rates globally (Figure 1). [...] The transformation towards a climate- and nature-preserving economy may in itself necessitate investments comparable to what was required to rebuild the European economy after the Second World War.15 According to estimates by the European Commission, annual investment in the energy system in the 2020s needs to be twice as high as in the preceding decade if we want to meet the objectives of the Fit. [...] Over the past two decades the literature has studied extensively whether and how monetary policy can have long-lasting effects on real interest rates, going in different directions.27 On the one hand, overly tight monetary policy may lower investment and technological growth.28 On the other hand, persistently expansionary monetary policy may lead to the build-up of financial imbalances and contrib. [...] Natacha Valla discussion and understanding of financial markets and institutions, the The views expressed are those of the monetary economy, the conduct of author(s) and not necessarily those of SUERF Secretariat regulation, supervision and monetary the institution(s) the author(s) is/are c/o OeNB policy.